Student Loans vs Investing

Ahhhhh….you’ve finally made it. 4 years in college, 4 years in medical school, 3-5 more in residency, and 1-3 more in fellowship and you’re finally making the big bucks. You’ve just started getting your first 5 figure paychecks and you feel like you have some money that you don’t need to spend on this month’s necessities. You’ve got a couple hundred thousand dollars worth of student loans hanging over your head, a big mortgage, and even a little bit of credit card debt. But you’re also looking at a huge tax bill, and besides, you don’t want to work forever, so you’ve been studying up on 401Ks and IRAs. How do you decide when to pay down loans and when to invest?

It turns out it can be a pretty personal decision, and there are a lot of factors that come into play, including loan interest rates, current interest rates and inflation, expected returns on your portfolio, current tax bracket, tax-sheltered accounts available to you, attitude about debt, and personal risk profile. But there are some general rules to follow, and some factors to think about. I’ll also give you my recommendations for common situations.

Loan Interest Rates

The higher the interest rate on your loans, the faster you should try to pay them off. Remember to look at the after-tax rate of the loans. For instance, if you make less than $150,000 per year, the interest on your student loans may be deductible. If your marginal tax bracket is 25%, and your loan interest rate is 8% AND your interest is fully-deductible, then your after-tax rate is 6%. (8%*(1-25%). Part or all of your mortgage interest may also be deductible for you. Credit cards and car loans are not deductible. For many Americans, and even many physicians, their best investment, no matter their tax bracket, is paying down high-interest rate consumer debt. If your credit card debt is accumulating interest at 22%, you should pay that down as your first priority. That’s a guaranteed 22% investment. You won’t find that anywhere, with or without a tax break. On the other hand, many of my med school classmates were able to consolidate their loans at 1.9%. Although Dave Ramsey recommends paying off all your debts ASAP, many wise people are willing to carry non-callable debt at very low interest rates because of the opportunity costs you would give up by paying it off.

Current Interest Rates and Inflation

If your loans are at 3%, inflation is at 4%, and your savings account is paying 5%, it is easy to see mathematically why you might not want to prioritize paying that loan down. Let me give you an example. In 1993 I took out a $5000 loan for undergraduate studies. It was a great loan from my state, with fantastic terms. It was 8% interest, but the interest didn’t accumulate and I didn’t have to make payments while I was in college….in medical school….in residency…..or in military service. I paid the loan off in full in one lump-sum payment when I got out of the military in 2010, just before it started accumulating interest. I spent 1993 dollars, and I paid it back with the same amount of 2010 dollars. Of course, 2010 dollars were only worth 66 cents of a 1993 dollar. In essence, I borrowed $5000, and only paid back $3300, and I got to use the money for 17 years for free. Moral of the story? When you’re borrowing money at rates below current levels of inflation or the long-term inflation rate (around 3%), you might want to think twice before rushing to pay it back. The CPI year over year inflation rate can be found here (it’s currently 3.56%).

Likewise, when you’re borrowing money at rates below guaranteed safe investment rates (such as money market funds, CDs, or FDIC-insured savings accounts), you might not want to pay it back too quickly. Remember, of course, to adjust both rates for your current tax situation. Borrowing money at a non-deductible interest rate of 5% to invest at 6% (4% after-tax) isn’t exactly a winning proposition.

Expected Returns

I mentioned earlier that paying off a loan with 22% interest is a no-brainer. That’s because the expected returns on investments available to you are nowhere near that. Don’t believe me? Imagine a world where 22% after-inflation returns were available to investors. You could save 25% of your income for 7 years and retire. Do you know anyone who did that? Me neither. Although estimates differ depending on who you ask, most experts agree that you can expect nominal (pre-inflation) stock market returns of 5-10% over the long run and bond returns of 3-6%. Naturally, those returns aren’t guaranteed. It’s one thing to borrow money at 3% and invest it at a guaranteed 5%. It’s entirely different to borrow it at 8% and invest it in the stock market that may or may not beat that return. An enlightening poll on the Bogleheads forum once asked at what loan interest rate an investor ought to invest instead of paying down the loan. The mean answer was 5%, but there was quite a bit of variation, from 2% to 10%. I think 5% is about right. Most loans at an interest rate above that should be given a pretty high priority.

Current Tax Bracket

Two investors who both have completely deductible 8% mortgages differ in one important aspect. The first, lives in Texas and finds himself in the 15% federal tax bracket and the 0% state bracket. The second, in California, is in the 33% federal bracket and the 9% state bracket. The after-tax interest rate for the first is 6.8%, but it is only 4.6% for the second. The second might very reasonably conclude that he should invest whereas the first might decide to pay down the mortgage. That high tax bracket investor might also decide to invest instead of paying down the loan because he saves a higher percentage of his income by contributing to his 401K or other accounts. The Texan only gets a 15% tax break for 401K contributions, but the Californian gets a 42% tax break. Conclusion: The higher your tax bracket the less anxious you should be to pay down debt over investing in a tax-sheltered account, especially tax-deductible debt.

Available Tax-Sheltered Accounts

We saw above that the tax code can really mess with the loan vs investment decision. The plethora of tax shelters available make the decision even more complicated. For instance, I might prefer to invest in a 401K where I get a big tax break before paying down a 6% loan, but might prefer to pay down the loan before investing in a taxable account. A resident who expects to soon be in a high tax bracket might prefer to get more money into a Roth IRA where it will never be taxed again rather than pay down his loans. Even college savings accounts, UGMA accounts, and health savings accounts offer some type of tax break to the investor. The more tax breaks available to you as an investor, the more you should lean toward investing instead of paying down loans.

Attitude Toward Debt

Many of us hate debt, no matter what the interest rate. I was listening to Dave Ramsey the other night when a caller called in asking if he should use his spare cash to pay off his mortgage. Dave’s suggestion was to pay it off, then in a few months if he really missed it he could take out another one. Obviously, nobody does that. There is a wonderful feeling associated with not owing anyone anything. Owning a house free and clear of the bank and knowing it can’t be foreclosed on (as long as you pay your property taxes that is) provides a great deal of security. Not having loans also provides financial freedom in that you need less cash flow to service them, and thus can work fewer hours, take a more attractive job that happens to pay less, or retire early. There is also the behavioral factor. Many of us say we’ll invest instead of paying down a loan, but in reality we spend the money. Obviously, paying down a loan is more likely to help your bottom line than blowing your cash on hookers and coke. The more you hate debt, the more you should lean toward paying off your loans, even if the interest rates are reasonably low. If you think debt is the best thing since sliced bread, I suggest you read the tale of “Market-Timer” a Bogleheads poster who managed as a grad student to lose a couple hundred thousands of dollars borrowed on credit cards and invested on margin in stock market futures.

Personal Risk Profile

Each investor differs in his need, ability, and desire to take risk. If you are a relatively conservative investor, or close to retirement, or simply don’t need to take on much risk, you should pay off loans before investing. The less risky your portfolio, and thus the lower the expected returns on it, the less sense it makes to carry loans while investing. For this reason I think it is stupid to carry a mortgage into retirement. It is foolish for anyone to take on more risk than they can handle or than they need to take. As Warren Buffett likes to say, only when the tide goes out do you see who’s been swimming naked. If you are mostly invested in CDs and treasury bonds, you’re probably going to do better paying down your mortgage and student loans than adding to your portfolio, especially with today’s interest rates. My Recommendations I think it is important to use moderation in all things. You don’t want to pay unnecessary interest on loans, but you also don’t want to miss out on investment and loan-related tax breaks or miss out on years of portfolio compounding.

I suggest you use the following list of loan/investing priorities:

1) Pay off high interest debt. Any credit cards or consumer debt at 8% or higher should be paid off ASAP. Honestly you should have never accumulated this. Live like a resident until it is gone.

2) Invest in tax-protected accounts. If you are a resident max out your personal and spousal Roth IRAs. If an attending, max out your 401K, SEP-IRA, HSA and any other retirement account that allows you full marginal tax rate deductions.

3) Pay off non-deductible loans between 5% and 8%. These include most current student loans.

4) Consider investing in other accounts that offer a tax break, such as 529s (kid’s college accounts), UGMAs, and backdoor Roth IRAs if your circumstances merit.

6) Pay off loans with after-tax rates of 3%-5%. These include most mortgages.

7) Pay off loans with after-tax rates below 3%.

8) Invest in safe assets in a taxable account such as CDs, bonds, and savings accounts. If these types of assets return to historic norms (4-5% returns) instead of their current 1-2% returns, then it is okay to invest in these prior to paying off very low interest debt.

9) Don’t carry any debt into retirement. Losing the safety net of on-going employment income makes this a risky affair. It’s one thing to get foreclosed on when you’re 30. It’s entirely different when you’re 70.

What do you think? How did you decide whether or not to pay off your student loans early? Comment below!

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161 comments

I want to make sure that I understand your suggestions: if a doctor finishes a long residency and fellowship with $3-400k in student loans at 6.8-7.9%–but no credit card or other high-interest (>8%) debt–he should max out fully tax-deductible investments like a 401k/profit sharing plan and defined benefit plan before paying more than minimum payments on the student loans? That’s what I got from your order of recommendations #2 and 3, but please correct me if I’m wrong. I know the value of compounding interest makes investing a big priority in those early years, but even if the doctor has no aversion to being in debt, the guaranteed return on paying back the loans isn’t enough to outweigh the tax deductions lost by not investing?

Yes, the guaranteed return of 6.8-7.9% is very attractive. But so is never paying taxes again on an investment (a Roth IRA) or getting a big fat tax deduction this year. When you weigh the two, I prefer the tax breaks, even if the long run return is similar, or perhaps even a bit less. But it’s hardly a wrong move to pay off loans at 6.8%+, and I wouldn’t fault anyone who opted to do that. Now, at 1%, that’s a totally different question.

I, personally, have made the opposite decision, though my situation is admittedly quite a bit different.

I’m currently 90k in debt at 6.8%, and have opted to pay the minimum amount into my student loans throughout residency and invest as much as I can into a Roth IRA, while I can do it without backdooring the process.

My logic is more of a thought experiment than a mathematical one, and I’ve never worked it out, but it helps me sleep at night. With the current repayment plan, I’ll likely pay off the majority of my debt before the PSLF kicks in. If I go private, obviously that won’t matter. However, if I can manage 20-30k of total savings in my Roth throughout residency, assuming a conservative return, that’s another year or two of retirement I can look forward to (even neglecting the backdoor process in the future).

Yes, it’s a similar return if I were to pay off my loans first, however, I like seeing my retirement numbers go up during residency because, no matter what I do within reason (meaning I’d have to live in an area with high crime to pay off the loans during residency), I’ll still have some loan total upon leaving residency.

I know this comment string is old, but I’m asking the same question right now. Debt obviously has an interest rate that we consider heavily when making our decision, but does a Roth IRA (or 401K, for that matter) have a similar/comparable figure that we can compare against this to actually determine whether it makes more financial sense to pay down debt or max out a Roth IRA? There’s got to be a straight forward mathematical equation that can answer which one will win out, right?

I KNOW FROM YOUR PREVIOUS POSTS HOW MUCH YOU DISAGREE WITH TAKING OUT CARS LOANS. BUT SAY I TOOK OUT TWO CAR LOANS WITH 1.49 AND 2.49% RATES. SHOULD I USE EXTRA FUNDS TO PAY THESE DOWN FIRST, OR LAST BASED ON YOUR ALGORITHM ABOVE?

Jim, thank you so much for your website. It’s provided lots of helpful info and I’ve referred most of my friends to this site. I recently refinanced my loans through DRB and was wondering where you would place a variable rate into your “triage” of financial recommendations? It’s currently 2.75% (2.5% + LIBOR). My wife and I already max out our 403b and I now have a 457b available and will max that out, which will get us close to our goal of 20% savings. I have about $300k of student debt, 1/2 @ the variable rate, 1/2 @ 4.5% and no other debt. We want to aggressively fund our future and are putting all excess money towards that. According to your recs (after filling up our pre-tax space), you would put money towards backdoor Roths/HSAs, then pay the 4.5%. Where would you place a variable rate in this picture? Just abide by its current rate or consider it a higher (>5%) rate? Thanks for all your thoughts!

There’s no right answer to this question, of course. If rates go up, you’d have been better off paying the variable. If they stay the same or go down, you’ll be better off paying the fixed. I would personally just abide by the current rate, so in your situation, prioritize the fixed loans over the variable. If rates go up, I’d redirect the cash to the variable. Either way, I’d live like a resident until they’re gone. That’s a heckuva lotta debt and you need to get rid of it, even at relatively moderate rates.

Thanks! I know, we’re living minimally. Would a high debt burden alter your priorities at all regarding saving for retirement? Or would you still fill as much pre-tax space as available? And would you fund a Roth before paying these loans off, as suggested in your above recs?

I wouldn’t skip out on tax breaks to pay down low interest loans, even with a high debt burden. What I would do is live very cheaply so I could pay down the debt above and beyond the retirement contributions. If you have a net worth of -$400K, you have no business living high on the hog, even if you have an income of $200K.

As I approach starting my first job as an attending this July, I have been working on a budget to see what my finances will be like based on all that I have learned from reading this site over the last few months (almost obsessively so – I love it!). I am single, have no kids, and don’t have any state income tax. In July I should have about 210k in student loans at 6.375% that I hope to refinance with DRB. I will start at 170k salary and will be able to participate in the TSP for retirement contributions. I also plan to do some moonlighting and hope to make about 50k per year doing that. As far as I understand, I should be maxing out my TSP and solo 401k plus a backdoor Roth IRA, then paying my student loans (which will hopefully be in the 3-5% range thanks to DRB). If my calculations and assumptions are correct, and I put all my projected bonuses towards my student loans, I should be able to continue my current lifestyle (comfortable but not extravagant) and still have my loans paid off in about 3 years (paying more than 5k per month towards student loans) while still investing for retirement. I didn’t think that would be possible!

That’s pretty aggressive ($17.5K into the TSP, $5.5K into a backdoor Roth IRA, $9K into a Solo 401K, and ~$80k into student loans). That’s $112K of your $220K accounted for, leaving $108K to live on (including taxes, which will be significant for a single employee with only $26.5K being able to be sheltered from taxation.) Can you do it? Absolutely. Would I do it? Probably. Should you feel badly if you don’t quite get all that accomplished? No way.

What do you think about a first year internal medicine resident with a household income of approximately $90,000 and a student loan debt of $180,000 at 6.8%. My wife has a 401K plan in which they will match 20% of any contribution up to 6% of her total income(approx. 39,000) essentially a 2,300 pay increase if maxed. We feel that we can set aside approximately $20,000-25,000 yearly for savings/retirement above our basic loan payment. Do you think we should slam away at the student debt or save for retirement and plan on living like a resident post residency for some time to clear the debt as quickly as possible. Sorry this is a lot of detail. We have gone back and forth and feel that in the end it is probably a wash but just thought a second opinion would be worthwhile.

$90K? I’d probably opt for Roth IRAs/401Ks for most of my savings. I’d make sure I paid enough student loan interest to get the $2500 deduction. I’d consider refinancing with DRB or SOFI to get that rate down, but realize that may increase your monthly payments since you can’t be on IBR with refinanced loans. I’d also consider PSLF and rule that out prior to refinancing. Paying down 6.8% debt is never a bad move, of course. That’s a fantastic guaranteed investment.

Do you treat a practice business loan at 4.75% (3.325%) at a 30% tax bracket – the same as a home mortgage loan? If all the tax sheltered retirement accounts are maxed out and you have the option to invest in a taxable account or the practice loan which one would you contribute to?

135K loans from undergrad + med school. Weighted average interest of all loans at 6.4%, but most individually are 6.8%. No other debts. Own both our cars, rent, etc. One child.

Wife makes 30K. I’ll make 49K as PGY1. Rough estimate of accrued interest per month ~ 750 bucks. First year IBR req’d payment is 0 first year, 350-450 second year, and 700 PGY3 based on prior year tax return. We believe we can budget 750 per month for my loans, so easily enough to cover IBR payment and prevent interest accrual. However, that would probably only leave us 350-500 dollars per month, after other required expenses, to invest in Roth IRAs.

Is that smart? Keep the interest on loans low and just invest the extra? OR should I pay less on my loans and invest more aggressively, at least in our Roth accounts? I’ll probably have 6 years of residency + fellowship. With a lower debt burden (relatively for med students anyway) and potential changes in the program, I’m skeptical of the value of pursuing PSLF, so I would most likely aggressively pay off loans as soon as I’m an attending.

Any advice you have would be helpful, including any calculators, etc. to help work through such situations. Great website. Already ordered your book to educate myself. Thanks again.

Found this one in the spam folder while looking for another one that got blocked.

There’s no right answer here. Paying down the loans is a great investment. Maxing out the Roths is a great investment. Try to do both as much as you can. If you really hate debt, lean toward paying off the loans. If you really value Roth space, lean toward maxing out the Roths. You may find you run into more money than you planned and be able to do both. Personally, I’d max out the Roths each year and throw what I could at the debts. Then, upon residency graduation, go hogwild after that debt and try to get rid of it in a year or two.

Just curious about your thoughts on our situation. Married, wife is stay at home mom for our young daughter. About to graduate fellowship and start a job with $190,000 first year salary, increases to $220,000 2nd year. Prior to having our daughter, while my wife worked,we lived off one salary and used the other to pay off my high interest med school loans.

We are now left with around 160,000 in med loans ranging from 2.1% up to 4.29% interest rates. We recently bought a house and thus also have a $260,000 mortgage at 4.2%. Combined we have around $160,000 in various retirement accounts. We unfortunately also have a whole life insurance policy I was suckered into buying and it is costing us around $4,500 a year…which I am leaning towards cutting our loss and cancelling it.

Should we focus on student loans or pump as much into retirement as possible? We do donate 10% of income to charity but otherwise live extremely frugally and want to save as much as possible/get out of debt as quickly as possible. My dream is to hit 55 and be able to retire (though I don’t see myself truly retiring at 55).

Thanks for any guidance and for the website/book. My wife and I have loved finally getting a better grasp of our finances and taking control of more of it.

Thanks for the reply. If we cancel our whole life policy we could free up money and have enough to max out the retirement accounts and still put an additional chunk towards the higher interest med loans.

Makes sense but mentally its hard to bail on the whole life policy since I am pretty much throwing close to $9,000 away if we admit it was a bad decision and walk away

I struggle with this regarding paying debt prior to meeting your savings goal. Having read other posts of yours concerning paying off mortgage early I assume the extra money you are working with is after already meeting your savings goal.

What do you think of paying down debt prior to reaching your savings goal. Assume all tax advantaged accounts are maxed as well as backdoor ROTH and HSA if available. If that amounts to less than a 20% savings rate would you place that in taxable or pay off debt. I have student loan at 4% and mortgage at 4.875% and I’m in that predicament now. It seems in reading boglehead forum most favor moving #5 (taxable investing) below paying debt in 3-5% and some probably would argue even below the 3%.

I worry about the opportunity cost of compound interest in paying debt with extra money after maxing tax advantaged accounts yet hard to argue with those preferring a risk free 4% return.

There’s no right answer to your dilemma, but I would prioritize student loan debt at 4% over a mortgage at 4.875% unless you plan on dying soon. Nobody has called me on it yet, but my list in the book is slightly different from the list here.

Love this site. Unfortunately didn’t get much financial guidance in med school and am currently a PGY-1.

I am trying to decide what to do about my loans. I have about ~120k (at ~5.8-6.1% interest) in loans right now, ~40k in mutual funds, and make ~48k/year pre tax. I qualify for the Pay as you Earn plan which will not require too much of a monthly payment. I am debating about what to do each month with excess funds. I know I need to stockpile some emergency funds in-case of something unforeseen happens, but after I do that I need help. Can’t decide between putting money in a retirement fund (Roth IRA), invest further in my mutual funds, or to pay off debt.

Really seem to be stumped on this and think a lot of new PGY-1’s could benefit from your advice.

The post you’re commenting on is that advice. The fact is there is no right answer, since both maxing out Roth IRAs as a resident and paying down debt are good things to do. Since you’re in the PAYE program, and unsure if you’ll be doing PSLF, I’d lean toward maxing the Roth. I would certainly do everything I could to transfer your taxable mutual funds into Roth accounts during residency by living off them while putting salary into a personal and spousal Roth IRA, as well as any Roth 403B or Roth 401K accessible to you.

Have only recently discovered your site and really enjoy it! Thank you. My question is one that is probably obvious, but I am fairly naïve about this stuff and want to make sure I’m understanding it correctly: You recommend saving 20-25% of income for retirement. Is this calculated off of gross or net income?

Also, say after maxing a Roth IRA and 401K each month, I haven’t saved my 20% for that month (say, the contributions only add up to 15% of income). Should I put that extra 5% towards my 6.8-7.9% student loans, PRIOR to any other saving/investing? If so, it seems that it would be several years – that is, until my loans were paid off – before I would get to the point of actually saving 20% per month.

I use gross income. But if you want to get really specific, why not make your own calculations? You may find your number is 18% or 21% or something else. It’s just a rule of thumb.

Paying off 6.8-7.9% student loans is an awesome investment. If I were you, I’d live like a resident so you can both max out retirement accounts and pay off those loans at the same time. I would NOT invest in a taxable account prior to paying off those loans. So basically, if you have loans like that sucking the life out of you, I think 20% is far too low a percentage of your income to dedicate toward building wealth. I’m recommending you put 20% toward retirement (or at least max out all available retirement accounts if that is a sum less than 20%) AND throw huge chunks of cash at those loans to get them paid off within 2-5 years of residency completion. I know that means you won’t be able to enjoy the “attending lifestyle” for a little while longer, but that’s the price you must pay if you wish to be financially successful.

I wasn’t as clear as I should have been: The 20% I was talking about was only for retirement; I do my best to pay down sizable chunks of my loans each month, probably close to 25% of my income or more. So I’m wondering if, AFTER paying, say, 25% of my income towards my loans while maxing out my tax deductible retirement accounts, should I use the “leftover” money I have to pay more towards my loans – even if I haven’t saved the rule-of-thumb 20% for retirement that month. I think you answered my question by saying that you would not invest in any taxable accounts prior to paying down the loans. So if my retirement saving is only 15% one month because at that point my Roth & 401K are maxed out, I should take the “extra” 5% and add it as a bonus payment on my already heavy student loan payment. Let me know if I’m off base there.

My major concern with throwing everything I can afford to at my student loans is that I don’t really have a lot of liquid cash, aside from a $20,000 emergency fund that’s just in a regular savings account. I am a 2011 dental graduate and she is also a healthcare professional, and we do live fairly cheaply: $77,000 mortgage is our only other debt asides from the $400K or so in combined student loans (a number that is VERY scary!). We recently got married so are starting to get pretty serious about our financial future… it sure can seem like there’s no light at the end of the tunnel when looking at those monster student loans.

I think you have it exactly right. I think a $20K emergency fund is plenty when you have 6-8% loans and a $77K mortgage. That should cover 3 months expenses. The habits you guys are starting out with are going to make you very wealthy very quickly. Nice work. Sorry you have such a huge student loan burden, but it’ll go fast.

As White Coat says you aren’t off base on what you describe above. I was struggling with a similar decision and a reply to a post I made on the Bogleheads forum helped me a lot. Basically try not to think about it as should I pay my loans off or invest this extra money because doing either is increasing your net wealth. Ultimately you can retire when your net wealth is high enough. Again, doing either, paying loans or investing, increases your net wealth. Which is why so often you read it comes down to the interest rate of the investment vs the paying of the loan. In essence they are both investments. If you’ve come this far you know no where are you going to find a guaranteed return comparable to your student loans so you should invest in paying them off. It is the fastest way to increase your net worth. Your answer at that rate is pretty easy. The hard one will be when that’s paid off should you pay off your mortgage sooner or invest in taxable. There the answers get harder and people disagree on the order it should be done. The prioritized listing above is even different from the one that made the cut in White Coat’s book so opinions change with time. My loans are only 3.5% so I’m splitting the difference…investing to my 20% in taxable and throwing all other moneys toward the loans. Is that the right answer? Who knows but it works for me.

You’re correct that they are different. Very observant. I was considering updating this post with the list in the book but never got around to it. Even so, the changes weren’t huge and the principles were the same.

First, I love the website!! It is easily the best resource I have used as I begin my medicine career. I’ve referenced the site to countless other residents and attendings who are now following you as well. I personally have read many of the posts and will continue working through future entries as well as read many of the recommended books you list on the website. As your time is precious, I will give you a quick summary of me and my specific question.

-Currently PGY-1 osteopathic intern in Florida making 44K/yr
-I will start dermatology residency next year
-Currently have ~200K in student loan debt, all of which is at 6.8% interest (Stafford loan)
-My wife is an emergency PA, with no student debt, making about 90-100K annually.
-I have been maxing out my Roth yearly and now have ~20K.
-My wife’s Roth now stands at ~45K.
-We also have 50K in a nonretirement, fidelity account.
-10-20K in our bank account as cash for monthly bills as well as emergency fund
-We currently do not have any kids although are looking to have #1 in 2-3yrs

My question deals with how best to allocate our money. Having a combined salary of ~140K is a nice luxury not shared by many other residents. We are currently both maxing out our Roth funds annually (dollar cost averaging, index funds, etc…). Our current employers do not offer a company match. I am wondering if it makes sense to fund our 401K/403b funds or put the money towards my student loans as highlighted above.

I am aware to take full advantage of a company match (which is not offered in my current employer), but in this case I have mixed feelings about further contributions. On one hand, I am eager to pay down my loan as quickly as possible as that is a fixed cost at a (relatively) high interest rate. On the other hand, by paying only $1300 or so a month towards the loans (25yr fixed option) we have excess money that can be contributed to our 401K/403b. For 2015, I believe this is 18K for each of us. For two people, over the rest of my training years, that is significant money which can then be converted to a Roth IRA before I become an attending and am pushed into a higher tax bracket. Additionally, as dermatologists are in high demand, I know that some initial offers will pay off a significant portion of student loans (although of course I can’t guarantee this).

First, don’t pay off loans that will be forgiven. Most docs don’t know if they’ll be eligible for any forgiveness until they are about to finish training and see if they’ll be working at a 501(c)3. I don’t know the field of dermatology very well, and what percentage of jobs are 501(c)3s, but that’s the first consideration.

Second, if you think forgiveness is unlikely, it would seem to me that the fact that some employers may offer loan repayment shouldn’t be a big deal. You’re unlikely to get them all paid off in 3-4 years on a PA salary (although I suppose its possible), so there should still be something to be repaid by an employer. Plus, honestly it’s all the same to the an employer-higher salary vs other benefits vs loan repayment. If you don’t need one thing, negotiate elsewhere. It’s all cash to the employer.

The 401(k) plan is a pretty good one. Check and see if there’s a Roth option, and if so, use that. If not, you can do the conversions after you finish.

Firstly, I started reading your website when I started residency and it has been my go to source of information for trying to figure out my finances! Thank you so much for starting/running this website.
I am trying to figure out what you would advise in our situation –putting more money into retirement savings versus paying off debt. Both my husband and I fall into the category of extremely debt averse so have been putting most of our money into paying down debt. Started residency with a student loan of 250k all at the 6.8-7.9% federal loan rate. My husband only has undergraduate loans of 22k which are at the 3.5% interest rate- so we have held off paying anything above the minimum on his loans. My loan is now down to 200k 1.5 years into residency and all the grad plus loans at the 7.9% rate are paid off.
My husband just took a new job, which puts us in the lucky position of having a combined income of 200k currently with no children, mortgage, credit or car payments, and fairly low rent. We also have 6 month emergency fund of 30k.
For the first time, we find ourselves above the income level for Roth IRA’s and neither of our jobs have any 401k match. Would it be reasonable to skimp on retirement saving for the next 2 years of my residency and continue to maximize contributions towards the loans? We both only currently have 12k each in our retirement accounts. Currently we put 4k a month into the loan and with the new income, we were planning to up that to 6k.

Basically, with a combined income of $200K, I’d just consider yourselves “attendings” as far as finances go. Refinance the loans and keep paying them aggressively. Start doing backdoor Roths and give serious consideration to doing Roth 401(k)s as well. Live like your (resident) peers and there will be plenty of money to build wealth with. It’s not like there’s a bad choice here between maxing out retirement accounts and paying down those loans. I’d say the most important thing is how much money you put toward doing either, rather than which one of the two you do. Personally, I’d max out all available retirement accounts and aim to have the loans gone within a year of your residency completion.

Hey WCI,
Love the site and book! Thank you so much for all you’re doing. I was curious as to where you would place a cash balance plan (shooting for a 4% return) in your list of priorities for investing? I’m suspecting you would prioritize this above investing in taxable accounts but curious to hear your take. Thanks!

The same principles apply. Maxing out retirement accounts and buying investments with high expected returns is probably a better choice most of the time than paying off very low interest rate debt.

Inflation was below zero from January to April of this year, but only at an annualized rate of something like -0.10%. Last year it was 1.62% and it has ranged from -0.34% to nearly 4% over the last ten years or so.

White Coat Investor, I love your site, your book, and the insightful posts that you often make in the Bogleheads forum! A quick comment: in this blog post, your replies to its comments section, and in your writing elsewhere, you speak in fairly absolute terms about the wisdom of pursuing a tax break for student loan interest paid. This is characteristically great advice for many of your readers — but it makes the baseline assumption that all or most of your readers are married. For *unmarried* physicians and allied personnel, post-education salaries generally fall either squarely within or decidedly outside of the 60-80K phase-out zone for single tax filers seeking tax breaks for student loan interest paid. e.g. I’m not a doc, but I’ve been a tenure-track faculty member in a non-medical specialty at two different medical schools since completing my Ph.D. in 2008 with $125 K in student loan debt (6.5% rate). In both of these starting med school faculty positions, my salary as a single filer was too high to qualify for the student loan tax break. (In my case, my solution was to contribute to my workplace 403b but defer Roth/TIRA payments so that I could focus on wiping out my student loan debt in fewer than 10 years, a process that I completed in February 2015.) I’m not asking you to devote lots of ink to life situations that don’t apply to you, your wife, and most of the folks you know, but including a few sentences or even just a few words acknowledging that many of the strategies that you describe apply only to married folks would be welcome. In the meantime, thanks again for your fabulous, supremely-helpful work! Cheers.

I’m not quite sure what you’re referring to with regards to the single/married issue. I do frequently make the statement that attending physicians generally can’t deduct their student loan interest, which frankly is true whether they’re married or not given the typical attending physician salary. It would be a particularly poorly paid attending physician, single or married, who would qualify to deduct that interest, no matter how much is put into tax-deferred accounts.

However, if you make less than an attending physician, then sure, some of your interest may be deductible which may slightly change your after-tax interest rate and possibly change your financial plan.

Love this site and have been following for a long time. Because I have only lurked up until this point, am now curious as to your take on my and my wife’s situation. Although not MDs, I am a Physical Therapist and my wife is a Physician Assistant.

We are both 28 and have a combined $130k in student loan debt, all between 6.8-7.9% federal rate. Following recent raises, our current income is a combined $200k. We have no car payments or Credit card debt, no kids (next year?), but have one mortgage with an $1800/mo payment. We have auto-withdrawals set to maximize Roth IRA contributions for each of us – this will need to be changed next for 2016, once we have a full year of our current salaries as we will be ineligible. Neither of us has access to a 401K, however my work will offer one within the next 6 months, unsure of match amount. We currently have a $20k emergency fund in addition to an inherited IRA account from my FIL’s passing that is currently valued at $70k that we also can use as an emergency fund.

We have been debating a few different options:
– Re-finance the loans privately to reduce the interest rate & aggressively pay the loans into the early years of our upcoming child’s life in order to have them gone before they even begin pre-school.
– Stay within our current repayment situation (25 year standard repayment with 22 years remaining) in order to maximize our cash-on-hand and ability to contribute to retirement accounts
– Stay in our current situation, so we are covered by Federal regulations should the repayment terms/programs change, but pay extra $$ each month towards the loans to aggressively pay them down within 5-10 years instead of 22.

Our main hesitations are leaving the federally-backed loans and the safety net that they provide (ie- new programs, forbearance, etc). What we wonder, however, is if we plan to pay all the loans off within 5 years, do we really need that safety net anyway? Finally, with our ages, we wonder if it is more important to be investing now as we have time on our side, or if waiting 5-10 years still leaves us with enough time after the fact to begin contributing for retirement? Another consideration is that while we make good $ right now, our salaries have likely maxed out (outside of inflation), so we don’t expect any significant increases to come down the line, unless we make a significant change within our fields which is very unlikely.

I’d refinance and pay them off. $130K on a $200K salary is very doable in a couple of years. In fact, I’d probably do what I could to pay it off in 12-18 months so we were free to have one of us cut back or quit altogether when that kid(s) comes along. That debt is large, but not in relation to your shovel. You can do it!

Thanks so much for the reply WCI! I think this is the best move for us as well, and one that would give us peace of mind knowing the loans will soon be gone. A few other things: Would you continue to contribute and max out a Roth for each of us for the 1-5 years it took to pay these down (not sure the timeline we will choose yet)? Once I qualify for a 401K at my work in the next 6 months, should I begin contributing to receive the company match? Or, should all of our available assets go towards the loans? I am likely going to refinance privately and get a 10 year repayment period, in order to give us a little more cushion with a lower monthly payment, though still paying additional $ every month. I feel like this offers protection, just in case something were to happen with our income.

As noted in the article, there is no definite answer some times. Don’t miss out on a match, of course. Try not to lose tax-advantaged space opportunities, but sometimes paying down high interest debt matters more than that. It’s a complicated decision. Best option sometimes is to do it all by living like a resident sometimes, but if you can only do one or the other, you can at least know that both are building your net worth.

And lastly, with the current Democratic candidates exclaiming a need for student loan reform, additional repayment programs, etc., do you think there is any benefit in waiting until the next presidential election/term to see what the Fed decides to offer people with student loan debt? (I know, I know, but I had to ask).

I currently have $230k (200k principle+30k interest) loan accruing interest at 6.5%. Currently a PGY3 radiology resident and most of the jobs I am looking at are not 501(c) institutions unfortunately. My wife and I made 85k post taxes this year (2015) and will continue to make around that much the subsequent years until I graduate in 3.5 more years (after fellowship). We also have a 141k mortgage (Adjustable rate at 3.25% and mortgage payments of 1k/month).

My question is should I think about refinancing loans knowing that I am not eligible for loan forgiveness. If so when should I reconsider refinancing?

Hard to say. You say “most” not all and that suggests PSLF is still a possibility for you. You also have the REPAYE vs refinancing debate /calculation to make. I guess I probably wouldn’t refinance until I was sure I wasn’t going for PSLF.

This site is awesome, reading the comments section I have learned additional information as well. I obsess when it comes to unimportant things like photography or cars. Now I am diverting my attention to something more worthwhile such as my own finance and retirement plans. I read your book, now I am ordering several recommended books that I found on this website to further add to my fund of financial knowledge.

PGY1 currently with ~114k of student loans so far. My salary around ~50k and wife 30k school teacher. I maxed contributed my Roth for 2015 and the employee 403b 6% + 4.5% match. The rest was thrown into loans and household items. I bought a Condo for residency with average payment of $950/mo with $265 monthly HOA, rented a room to a co-resident for $700/mo split utilities.

Just starting my financial building at age of 27 now. Does my preliminary plan sound, sound?

This year I plan to contribute to the spousal ROTH IRA as well. I have most of my finances with Merrill Edge but will move to a Vanguard account once they charge me fees which apparently doesn’t start until you have 250k with them. Ill probably do the DRB refinance as well. My plan is to throw everything to a Vanguard 2055 until I have more time to figure things out (or read/learn more then I do now). Wife has a car note still but mine is paid off. I’ll continue the 403b match which lets us move our funds if we keep it with them for 3 years. Wife may start speech pathology studying my last 3 years of residency in my 4 year residency. I will still try to max the spousal contributions. She will get student loans and some parental assistance.

I am holding off my desire to buy a used car till after I pay most of my debts off.

One additional question, I have not done my taxes ever. I know you recommend doing your own taxes. I plan to read up on it more but with ICU rotation around the corner, I might not have enough time to be well read.

Do you recommend software such as Turbotax or is there another method to file taxes without these software?

I think you learn a lot by doing your own taxes. That said, it’s hardly mandatory. The point is to learn about the tax code. You can also learn about it by reviewing your tax preparer’s work. Turbotax is fine. It’s what I use, but it is the most expensive of the tax software programs.

Hi there,
First of all just want to say THANK YOU for creating and maintaining this site…I stumbled upon it about a month ago while researching what I’ve now come to realize is a terrible whole life insurance policy (I’m in the process of getting more appropriate term life insurance in place before getting the heck OUT of the other one) and since then I have been spending a good chunk of my free time reading the site and have read several of the books you’ve recommended, including yours. I feel like it’s really opened my eyes to all of the mistakes I was making financially, when all along I thought I was doing pretty decently with paying off debt and saving for retirement. My husband and I got married about 4 months ago and are in the process of combining bank accounts and starting to make a real plan for the future, which included sitting down for a budget/savings plan a few days ago. Here’s what we’ve come up with- I would love to hear if you think this seems reasonable or if there are any glaring mistakes. A little background- I’m 32, a veterinarian, and am shooting to retire in about 30 years. My husband is 28, spent 7 years in the Marines, and is currently in school using the GI bill. Our current gross income is around $190k (with about 30k of that tax exempt from the GI bill living stipend and my husband’s medical retirement through the VA- he is a late-onset type 1 diabetic that they are (fortunately for us) attributing to a probable immune-mediated response to a viral illness he contracted while deployed in Afghanistan.). He is considered 60% disabled which means that he will get $1100 a month for the rest of his life (more once we have children, and it will increase based on inflation in the future). Since we have this guaranteed income for life, I backed our retirement contributions down to around 15% of our gross income rather than the 20% that I was initially shooting for. Here’s how we currently have things allocated:

-Paying $1200 a month toward my 93k remaining student loans (4.65%), which will have them paid off in ~7.5 years
-$2000/month toward our 30 year mortgage (including property taxes/insurance) at 4% (289,000 remaining- but home value has grown from $352,000 at purchase in 2012 to estimated $540,000 based on Zillow- we live in San Diego)
-Saving 13% of my primary income (115,000 gross) into my 401k (there is an employer match but it varies year to year; I’m conservatively estimating it will be around 3%. Total in 401k ~80k right now
-Maxing out both of our Roth IRA’s (currently at NW mutual but soon to be at Vanguard)- started recently so combined only about 8k
-Aggressively paying down our one remaining debt other than mortgage/student loans, my husband’s car loan- has about $14k left to pay off at 3.9% but putting $1400 a month so should be gone in about a year. The interest rate isn’t bad but I’m morally opposed to a car payment and thankfully have gotten the hubby on board
-Saving $300/month to our emergency fund (which is tiny right now, only 2,000)
-Saving $300/month toward my next vehicle (planned to be purchased in about 5 years)
-Living on the rest

This all will likely change in the next 2-3 years, as we plan to start a family so will incur more expenses, but my husband will also be done with school and hopefully gainfully employed with a significant pay increase (he’s hoping to get into medical sales in the diabetes field, so potential for a good salary). I feel like we are doing a pretty good job now, but would love any feedback on ways to tweak it!

Also, as a second question- is there any particular way you feel it’s smart to make monthly investments towards a future purchase (i.e. car, home improvement, etc) rather than just racking up cash in a savings account? That’s what I am currently doing but feel like I might be missing out on potential growth given that we have 5 years before we will really need it.

You have no idea how much effort I’ve spent getting you to stumble in here. Trust me, I want to be found.

Congratulations on your financial success and newfound knowledge. An income of $115K is pretty darn good for a vet isn’t it, and $190K is a lot of money. I was 5 years out of residency before I ever made that. I seem to run into a lot of vets with 5 figure incomes and 6 figure student loans. You should be able to get rid of your student loans relatively rapidly. I’m not a big fan of the military’s disability rules, but I can’t blame you guys for playing by them. My favorite is the guys who think the military gave them their sleep apnea which is apparently good for a really high percentage disability too. I mean, it’s one thing if you got shot in the leg, but sleep apnea? Bizarre.

I think it’s ridiculous for you to carry those student loans out for another 7.5 years. Why not pay them off in 2 years? You can do it! But you seem to lack the power of focus right now. You’re trying to do 10 different things at once. I might suggest a more focused approach.

# 1 Sell the car and buy a $5K car. That’s a 7 year old Sentra with 100K miles on it. Every time you drive it, it will remind you of how badly you want to be out of debt and financially set. Don’t worry, you can go back and buy the fancy car in a few more years with cash. Now that debt is gone.
# 2 Save up an emergency fund. Since you have $1200 a month guaranteed, your emergency fund doesn’t have to be huge. Maybe $10K. You should be able to do that within a couple of months.
# 3 Remember that you can put off Roth IRAs for quite a while. You have until April 2017 to make a 2016 contribution. Take advantage of that as much as possible.
# 4 It is utterly bizarre to be saving up $300 a month toward another vehicle while making payments on one you already own. Stop doing that and direct that $300 elsewhere.
# 5 Write down a date you want to be rid of the student loans. If it were me, that date would be less than 2 years away, but I think it would be reasonable to push it out to 3. When your husband finishes school, there should be a big boost in income, no? Use that entire boost to get rid of loans and max out retirement accounts.
# 6 The 401(k) is a priority, but it wouldn’t be the end of the world to skip it for a year or two to get rid of the student loans faster. Think how much nicer your monthly after-tax cash flow will be without a student loan payment. It will be way easier to save and enjoy life. As you start a family, that financial freedom will become very important to you.

My “future purchase” savings sits in a savings account making 1%. But I don’t have some other awesome use for the money like you do. You’ve got at least 6 uses I can count that I don’t have any more- car payments, student loan payments, a relatively high interest rate mortgage, an unfunded emergency fund, Roth IRAs, and a 401(k). If I had all that to do, I’d put those future purchases off for a while until I’d taken care of those other things. Very few home improvements HAVE to be done and cars can last a surprisingly long time if you truly drive them until the repair costs more than the car is worth.

Thanks for the input! We are going to try to put several of your suggestions into play. As far as the vet salary goes, I’m actually sitting pretty good compared to the majority of my colleagues…I had a full scholarship for undergrad and was able to keep it to $120k in student loans with in state veterinary tuition in Iowa. I only graduated 7 years ago, but the average tuition has skyrocketed since then, they continue to open new vet schools and churn out more new graduates, and the field is oversaturated so salaries aren’t as competitive as they should be (I’m guessing you guys run into something similar on the human side of things) . Granted, I’m in southern California so the salaries are higher (along with the cost of everything else). I’m also in one of the more highly paid sectors of vet med (emergency), although I had to pay my dues with 6 years of nothing but overnight shifts before finally getting a daytime ER job. I also supplement my main job with some independent contractor work for an at-home euthanasia and hospice service, through which I’m able to pull in an extra $1500-2500 a month (pre-tax), which has really helped. I don’t know that I could now, knowing what I know about average student loans and salaries for vets, recommend that a young person go to vet school. A relief vet that I work with told me the other day she has $374k in student loans from a private vet school, that increase in principal every year by ~20k while she pays around $500/month in IBR. It will be up to around $800k at the 20 year mark when it is forgiven, so she’s saving another $1000 a month towards the eventual taxes. That seems absolutely insane to me. But anyway, to respond to your points,

#1: Yes. You and I are in 100% agreement on this but it will probably not happen. My husband did not have a lot of guidance on spending/saving prior to meeting me (I’m talking $10k+ in credit card debt, high car payment, no retirement savings, etc.). He’s come a long way and the credit cards are history, he’s saving for retirement, and has picked up 2 part time jobs while in school to help get us where we need to be. But, he’s not going for selling the car. I figure we should be able to pay it off by June 2016 though (see adjustments below in #4) so I’m not going to push it too hard. Plus one of his jobs is driving for Uber and the car is reliable and has great gas mileage, so is somewhat of a benefit.

#2: Seems completely reasonable, plan to do it after the car is paid off. So realistically could have that funded to 10k by probably August/Sept 2016.

#3: It seems to me that putting them off wouldn’t necessarily be the best move- wouldn’t you lose the benefit of over a year of compounding interest plus lose the benefit of dollar cost averaging by putting in one lump sum vs. monthly contributions?

#4: You are completely right but we just never looked at it that way. We have both been used to saving for things individually, and we are just now getting used to looking at finances as “ours” rather than mine and his. I have about $5000 saved up towards my next car, and have another ~4000 tied up in my whole life policy that I am going to cash out. We will take that $9k and put it towards the $14k loan on my husband’s car this month, and then should have it paid off in less than 3 months after that. I will likely need a car about 5-6 years (still driving my vet school car paid for in cash in 2008, which is now 10 years old. It’s held up well but is getting up there in miles. But, once we have the other things paid off in ~3 years we should be able to quickly accumulate cash for a car.

#5: I could continue paying my $1200/month student loan payment until August/September when it could bump up to roughly 2900/month, which would have it paid by (if I’m doing my calculations right) May 2019 (so 3 years 3 months). I think doing it any faster would really strap us financially.

#6: Oh man, this pains me to even think about doing. I think I will continue at my current rate given that with the above calculations we should have everything paid off within roughly 3 years (aside from mortgage).

I will hold off on a future purchases account for now but like the idea of the high interest savings account. I’m assuming there is a minimum balance to carry to get the 1% rate? What bank do you go through for that?

After running the numbers, I can’t believe how much we can accomplish in the next 3 years (and this is all really prior to my husband having his “real” job). I think we are both feeling pretty optimistic about things after looking at it from your perspective- thanks again!

You’re very welcome. I agree that if your husband is an Uber driver, and this car is primarily a business expense, a $5K car may not be the best idea, especially if you can have it paid off 4 months from now.

Wow! Your student loans have only gone down $23K in 7 years? That must be a bit depressing. Nowhere near your colleague going for IBR forgiveness (25 years and taxable) but still bad. I like your plan to get rid of it in 3 years much better.

Looking at your money all together is key.

Ally Bank is paying 1% now and has no minimum.That’s where my cash is.

Regarding the paying down debt vs investing argument- obviously there are many ways to do it. The ideal is to do both- max out retirement accounts AND pay off debt rapidly. The only way to do that is to boost income as much as possible and cut lifestyle as much as possible. There is definitely a balancing act there and there may be no right answer, just a right answer for you. But my general sense for you guys is that you’ve had too much comfort with debt, at least in the past, and maybe ought to prioritize it a little bit higher than you have. One other option you may have given your home appreciation is refinancing the home and rolling all the debt in there. That would be especially useful if you can get your rate down to the 3% range with a 15 year fixed.

Yes…student loans have been very depressing. Although I did defer my loans during my internship (no way to make payments making $25k and living in San Diego) so accrued additional interest during that time. Technically i started repayment August 2010 so have been paying for about 5.5 years and was probably closer to 130k before payments started, and was paying 6.5% interest until recently. I have been paying almost $400 a month more than the scheduled payments, I just never thought it was realistic to afford more than that for some reason. Hoping to get them paid off sooner rather than later at this point!

We meant if we invest that amount for daughter will it be benifial vs. pay off loan. I haven’t seen any post regarding paying off that much amount at one time. Also will it be better if we give that amount (off course the maximum gift) to daughter each year so SHE can pay off her loan for her
tax benefits
Thanks for your advise

Investing vs paying off loans depends on what the investments earn. Without a crystal ball showing future earnings, I can’t predict that. Paying off the loan is a guaranteed return.

Be aware of gift tax rules- you can each give $14K to her each year without starting to use up your estate tax exemption. Whether you pay the loans or give her the money to pay the loans, you have the same issues.

The amount has little to do with anything. It’s the same comparative issue whether you’re paying off $10K or $100K.

I’m currently a PGY-4 Gastroenterology fellow, my girlfriend is a child psychologist
I have 200,000 in loans, she has 180,000 and has a PSLF. I am not sure if I will go the academic route or into private practice.

Income: Mine 65,000 + 15,000 from moonlighting, hers 60,000.

I currently have 10,000 in a ROTH-IRA, having been putting 3000/year, but this year will start to max at 5500/year. I have a 403B through work that invests 3% of each paycheck, so I am saving 16% for retirement currently. Girlfriend plans to open 403B through school this fall, and she also has a pension.

I am currently paying 500/month via IBR on my loan, which is just keeping the debt at pay. This will likely jump to 700/month the next time I renew.

Currently I am saving for an engagement ring (done) and a wedding (just started will need 30,000 between each of us, this has been where a large portion of my moonlighting salary goes towards.

I will be able to moonlight substantially more next year so my gross income will jump from 85 to 100, then to ~110, then to about 300 when attending.

No credit card debt or auto payments at this time.

My current plan is:

1) Start maxing out ROTH-IRA at 5500/year
2) Invest 3%/paycheck into 403b, increase by 1%/year, with the increase in my moonlighting salary next year I will be able to save 20%/year for retirement.
3) save for important life events (wedding, travel (nothing too luxurious)
4) pay loans slightly above the minimum with plan to refinance and pay aggressively when I am an attending if in private practice, or PSLF if I stay at a 403b.

I am very new to investing/and just learning how to save money at 30 years old, :/ so this blog is extremely helpful (but I’m still a little confused, so would really appreciate any help).

I am a therapist in private practice and currently have $59,000 (current principal balance) in GRAD Student Loans (ranging from 2009-2011), with $5,000 in accrued interest over the last 7 years. As of today, I have paid $0.00 to the principal balance, and have paid $1330 towards interest since 2009. (I am also on an income-driven repayment plan with my loans.) My interest rates are fixed at 6.55%, (with the exception of one loan for $11,000 fixed at 7.65%).

As of today, I have paid off ALL credit card debt and undergraduate student loan debt.
I have also been able to save $45,000 towards my emergency fund and $0 toward any investments. (I actually just found out about a SEP-IRA today!!-woops)

I would like to start contributing to a SEP-IRA soon (possibly by April 2017), since I have my own Private Practice as of August 2015 and no retirement fund. (I opened a PLLC in August 2015.) My current income (before tax) is roughly around $100,000-$105,000 (and I have been in private practice for 1 year). (I also write off majority of my expenses. When I did my taxes last year, my return amount was almost exactly the amount I paid in taxes for the year.)

My end goals would be:
1) To maintain a safe and chunky emergency fund, (as my income varies and is not guaranteed, and the costs of living alone in NYC are extremely expensive).
2) To start contributing to a SEP-IRA account- (I’m not sure what amount is recommended here, given my current earnings and financial situation with my loans.)
3) To somehow pay off this Student Loan debt, (as it’s driving me bonkers) but also have a secure cushion in case I have issues with office/home rent and my business slows down. (I get very nervous about that!)

***Typo- Student Loan Debt is $59,000 (6.5%-7.55% fixed rates)- After paying off one of these loans, the current balance is $64,000 (with $5000 in accrued interest). Overtime, the unpaid interest totaled roughly $11,700.00***
*** In addition to this FedLoan, I have another Grad Loan from Navient for $10,000 (however the rate for this one is only 2.65% with the exception of one loan at 6.8% for $4500). This is also an income based repayment plan, and I have currently paid off about $4000 over time – loan was originally around $14,000***

What is your plan with the student loans? Are you planning to pay them off or go for forgiveness? It doesn’t appear PSLF is an option, so paying them off is probably best unless you really want to drag them out another 13-18 years and then have a tax bill for the forgiveness anyway. $74K seems pretty manageable to me with $105K of income. A few thoughts on your situation, perhaps worth exactly what you paid for them.

# 1 Consider leaving New York. There are some areas in the country where it is a much more difficult battle to reach financial freedom. New York and California are two of them. If you’re wedded to New York, fine, but realize that it will have a significant impact on the rest of your financial life- crummier cars, fewer vacations, more years working etc.

# 4 Given the cost of living, boosting your income is likely to be at least part of the solution to your financial woes. Maybe that’s seeing more patients/clients, maybe it is raising prices, maybe it is adding evening or weekend hours, maybe it is a side job or business. But there are two ends to the equation. You can either earn more or spend less, and sometimes it is much easier to do one than the other.

# 5 I sense a significant lack of urgency with regards to your finances. Without making you feel desperate or hopeless, I’d love to somehow give that to you. For instance, you talk about wanting to make sure you have a cushion for emergencies. Well, guess what? You already had a $74K emergency. Time to use that emergency fund to get rid of it and then cut your lifestyle to the bone until you’ve cleaned it up. https://www.whitecoatinvestor.com/your-debt-emergency/ You also seem somewhat clueless with regards to retirement savings. A general recommendation for a non-physician is about 15% of gross to retirement (I tell docs 20%). In your case, that’s about $16K a year, or something like $1400 a month, or most of what you think you can clear up to build wealth. That’s all above and beyond paying off student loans, saving up down payments, saving for college etc. Finally, I see that your debt management for the last 7 years has been lackadaisical. Not only did you carry credit card balances (you don’t need me to tell you that’s dumb) but you’ve basically made minimal traction on the student loans in 7 years. I guess if I had $100K in student loans (or whatever you had to start with) and a salary of $100K, I’d be trying to put at least $20K a year toward them, paying them off in 5 years, rather than looking for minimum payment plans where I wouldn’t be paying them down very fast.

Normal is to have student loans. Normal is to carry them for years. Normal is to be broke. Don’t be normal.

Thank you for your reply. I am planning to stay in NYC, and will definitely look into refinancing my loans, as I don’t believe loan forgiveness is an option for me.

I have only been making $80-100,000 in the last year, given I became licensed in December 2013, and worked at a clinic making $38-40,000 from July 2014-July 2015. I also worked part-time working under a therapist prior to starting my practice. I started making more money in the last year, (why I did not apply much of my income to graduate loans). Instead, I worked hard to fully pay off all of my undergraduate loans and any credit card debt. I no longer have any debt in that department- only (“only”) $74,000 in graduate loan debt.
More questions******
1) If I refinance my loans, what would happen then?
2) Given I have $45-50,000 in savings… do you recommend I keep in my personal bank account as it is, throw it in ALLY Bank, or do I take ‘some’ or ‘all’ of it, and apply it to my graduate loan debt? I am afraid to do this because I worry about not having any savings, as this is my first time living on my own and paying a lot of money for both an office and apartment in NYC.
3) Also, in regards to the retirement fund (I know you recommend 401k over SEP IRA), do I start investing NOW or wait until I have paid off ALL or SOME of this graduate loan debt???

I would put most of that $50K toward the student loans today and refinance the rest. The benefit of refinancing is a lower interest rate, so you can pay them off faster. So that’ll leave you with something like $30K in loans. I’d try to pay that off over the next 1 year, 2 at most, so I’d take a variable 5 year loan to get the lowest possible rate.

I think it is probably okay to delay your retirement savings a year to get rid of the debt, but there is no right answer to this question. Certainly I’d do both before I left $50K earning 1% at Ally (or less where ever it is now). You’re choosing between better and best and no one really knows which is which except in retrospect.

Lastly, I read your article about refinancing— I see there are many options- are there two companies highly recommend given my current situation? And is it better to refinance in 5, 10 or 15 years? Thanks!

I highly recommend them all, otherwise I wouldn’t list them. It only takes a couple of minutes to get a rate quote, so why not get the initial rate quote from 3 or 4 and then apply to the one with the lowest quote?

4.65% variable isn’t great. I bet if you took out a smaller loan (by paying off a big chunk of the debt with your $50K) you’d see a better rate from most lenders. Like I said, apply to several and see which one gives you the best rate.

Ok thanks. I guess I asked because 2 of them said they run my credit so I didn’t want to gain any hard inquiries!! But I’ll look into it more tonight. In regards to the 50k, I guess I worry because my line of work is so unpredictable (what isn’t right!?), but I imagine if I use 30k towards loans and keep 20k in savings as an emergency fund, I should feel secure. Do you think that’s a good split? Thanks again. This blog is so helpful. Can’t wait to share it!

Yes I totally agree! I guess because I’m trying to get the lowest interest rate with refinancing my loans, that I am trying to prevent any hArd inquiries from affecting my score. Right now I’m in the 720ish range and have not received any quotes less than 4.75, with the exception of one company at 4.25%. Do you think I should pay off a large chunk of my grad loans (say 30k), prior to applying to refinance to see if that has any effect on increasing my score and lowering my interest rate? Thanks

I love this blog also. I haven’t commented in quite a few months, but I am always lurking. I FINALLY took the plunge tonight and submitted a payment of $15,600 tonight to wipe out both my wife and I’s 7.65% federal loans. We now have all 6.55% federal loans remaining at a combined $120,000. We have paid this down from $200,000+ in the past 4 years, but this was mostly with big chunks at a time, some from inherited money d/t family members passing.

I am now looking to take our remaining debt and re-finance it privately for a lower fixed rate. I have received quotes from Citizen’s Bank for 3.99% 5-yr fixed OR 4.5% 10-yr fixed for only my portion ($79,000). Haven’t looked into my wife’s portion yet ($43,000). I plan to also look into SoFi and others.

Do you think this is a good idea to refinance privately? Both of us? Just me? Silly, but I am just so afraid/nervous of losing the federal safety net, but I know if I can get my rate to under 5% I should save quite a bit of money in the long run.

I should also add that my wife and I already have our IRA contributions set aside ($11,000 combined) and ready to invest. My wife should have access to her new employer’s 401K by January, with a match.

A reminder, I am a Physical Therapist and make ~$100K. She is a PA and makes ~$90K. We likely don’t have much room for increase other than cost of living. I have no employer retirement plans available, only my personal Roth and Traditional IRAs. Wife has Roth, Traditional, and 401K (2017).

Thanks, I did use this links page. I ended up finding Citizen’s Bank via the “Credible” website. They have the lowest rate listed for me, and by quite a wide margin (difference of 0.5 – 1.5% lower than the others – SoFi, Common Bond, etc)

Hi. So I am in the middle of getting approved to refinance my grad loans through earnest, (thanks for the recommendation). My debt with accrued interest is at $64k, so I’d like to complete this ASAP (since I’ve accrued $5k in interest since 2012-yes, not the smartest move). Since my tax returns from 2014 and 2015 are not as high as this year, they advised I keep the money in my savings ($50k), to improve my chances of a lower rate. Do you agree?

I was hoping to take $30k and pay off 30k of the 64k of debt I have. One loan is at 7.55%, (approx $17,000) and the rest are at 6.55%…

Do I wait for them to approve my application or is better to just make a $30k payment right now towards my grad loans, and refinance the rest ($34,000), leaving only $20,000 in savings to show?

I also have a higher rent but have decided to move come November 30, (all which has been documented via earnest). My current rent is $2400 but I found a place for $1400 so I can apply the balance towards my loans!

Please let me know your thoughts:
To recap-
1) $64000 debt- one loan at 7.55% and the rest at 6.55% (approx $43000)
2) deciding to wait until earnest approves my application for refinancing, and need to decide whether I should apply with $50000 in my savings, or pay off $30k in debt today, and apply to refinance $34k while showing online $20000 in the bank
3) 2014 income significantly low- 2015 income 30% lower than income earned 2016
-income for 2016 is estimated around 100-105k whereas 2015 was around 75-80k, and 2014 was under 50k
4) no credit card debt or other debt besides grad loans
5) current rent $2400 a month – will decrees to $1400 come December 1

If I owed $64K in student loan debt at 6.55-7.55% and had $50K in cash, I would send $49K to the lenders tomorrow then work on sorting out the rest later. If no one wants to refinance me, so what. I’d keep throwing money like crazy at that last $15K. Do you see the insanity of having money in savings earning 1% before-tax while paying 7.55% in interest (perhaps not even deductible)at the same time?

As far as how Earnest treats the $50K, I don’t know. I’d ask them I suppose as to whether you’d get a better rate with $64K in debt and $50K in savings or $14K in debt and $0 in savings.

Hi thanks for your reply. And sorrry I keep asking the same thing over & over!

So, I applied at earnest and first republic bank, and I was denied because my income in the last two years wasn’t consistent and lower than what I would be making for 2016 and future years. First republic told me to wait until I file taxes and reapply, as I may have a better chance to be approved (since my salary is higher for 2016). (Also, their minimum to refinance is $60,000, which is approximately the sum of all of my graduate loans.)

I know you recommend to payback loans ASAP, but do you think it’s worth the wait to try to refinance in January, and possibly get approved for a 7-year plan at 2.65%? (Kerry said this is the plan I would most likely be approved for after I file my taxes.) Or is better to still take a chunk of the money I have saved (let’s say 30k for example), and just pay off two big loans today?

(Btw just a reminder- my loans are at a fixed rate until 2030 through FedLoan, (one at 7.55% (about $12.5k with interest I’ve already accrued), and the remaining loans at 6.55% (about $51k with the interest I’ve already accrued). Thanks so much.

My student loan rate is 2.88%. I rationalized that if my investment return is greater than my student loan interest, it makes sense to pay my loan as slowly as possible and invest any additional savings in higher-yield investments. Thoughts?

So I live in an expensive town in CA with my hubby and two kids (our home town that exploded thanks to Silicon Valley), and we’re renting currently at $2500/month. Median house price is $825,000+, childcare $1200/month, and school for our other son may be free or may be $950/month depending on where he ends up. My hubby is finishing his masters and gets tax-free compensation from the VA about $30k, and I’m working part time (bc kids and long commutes for hubby out of town for school) but thinking of working an extra half-day, which will bump my tax bracket to 25%, so tax my after-rate is 9.5%(1-25%) = 7.125%. My student loans are $200,000k and growing on IBR at an average interest rate of 6.65% or so. Despite the GI Bill, hubby owes $50,000k and growing on deferment. Bc I was never finance savvy, I didn’t save for retirement until this year, and I’m nearly maxing out my 401k for the first time, but we haven’t been able to really save for anything else at all. Question is, should I stop contributing to my retirement and try to pay down some of my student loans now (maybe refinance first) and save for a house? 7.125% vs 6.6% and no home to call our own. I’m paying the car slowly at 2.9% and we have no credit card debt. But hard to know what to prioritize here. I think we’ve sadly realized that child number three won’t be financially possible, though desired. When hubby starts to work, his income will probably cover childcare expenses for our two current sons, but we were thinking of contributing all/most of it to his non-existent retirement (in about 6-12 months). Thoughts on how we should prioritize?

Honestly, you guys need to make some money. You have way too much student debt to be part-time unless your spouse has a huge income. It would also help if you could cut expenses. Which means move.

I’m not sure you understand how tax brackets work. Only the amount made in the next bracket is taxed at that rate.

If your goals include another kid and buying a house, I don’t see how the path you are on leads there any time soon.

If you aren’t going for PSLF (and you can’t unless you’re full-time) then I would try to refinance those loans. But even if you don’t refinance them, 6-7% is a great guaranteed return.

But whether you’re paying off loans or putting money toward retirement, they both build wealth and that’s what you need right now. I would submit the issue isn’t whether you’re doing loans or retirement, but the total amount of money going toward building wealth each year that is the problem.

$300K? I’d put $110K toward the student loan and the other $190K toward the mortgage. You might be able to earn more investing than those interest rates, but you’re certainly going to do better getting rid of the debt than what you earned on that money in a savings account over the last couple of years.

WCI,
I have been reading your blog for approx. 6 months now and am very happy to have found it and for the work you are doing to educate your readers. I have checked in on this post periodically to read the updated comments, and have noted that your tolerance of low-interest debt seems to have diminished significantly over time. When you initially wrote this article you put investing in taxable accounts at #5, above paying off low-interest 3-5% loans at #6, followed by paying off very low interest loans with post-tax rates <3% at #7.
I have noticed in more recent comments here that you are advocating paying off most debts as quickly as possible, which would implicitly prioritize them above taxable accounts. For example, in the reply to Steven above you advocate $110K to his very low student interest debt, and $190K toward the mortgage, which seems counter to the priority list in the main article. Based on the original article and other posts you have written (e.g. with regards to mortgages), I would have expected that you would recommend 20% down on the mortgage to get a 15-year mortgage at a current low rate of 3.2% or so without PMI, which for him at 400K income is an effective mortgage rate of 2.14%, and invest the rest in taxable given that his debt is all very low-interest (and non-callable). This would be in keeping with the original priority list at least.
Do you think that your view of low-interest debt has changed over the past few years? I wonder how the improvement of your own financial situation over the last 5 years could be informing the apparent change in your attitude toward such debt.
My apologies if someone has asked this question already, I have read many of the comments on this thread but I don't think I have actually read all of them!

You’re on to me. My need to take risk is rapidly dropping. If you have a high need to take risk, then carrying low interest rate debt and investing makes more sense. If you have a low need, it makes less sense. What made sense for me at a net worth of $1M doesn’t necessarily make sense at a net worth of $5M.

But there’s more to it than just my personal situation. The longer I do this and the more I interact with docs in real life situations, the more I pay attention to behavioral issues and the less attention I pay to what works best mathematically. Sure, it makes sense to borrow at 2% and invest at 7%. But it doesn’t make you financially better off to borrow at 2% and go heli-skiing. That’s what I’ve been doing. What have you been doing? If you’re buying any luxuries at all, and you’re carrying debt, well, you’re borrowing to buy luxuries. Money is fungible.

At any rate, there is no right answer here. The list is murky for sure and those who really read carefully will notice the list isn’t even the same in this post and in the book! I think there’s no doubt you should fund your 401(k) before paying off a 2% mortgage, but as the alternative investment becomes less attractive and your interest rate creeps up, at a certain point it no longer makes sense to invest instead of paying down debt.

Hope that helps.

Also, you should be aware that this year I am maxing out all my tax-advantaged accounts and investing some in a taxable account BEFORE throwing anything extra at the mortgage. So I guess I’m still following the list mostly.

I noticed in the podcast that you seemed to change your suggestions for when to begin contributing to a 529 for a child as well.

In the past, you’ve seemed to follow the mantra of, “Don’t pay for your children’s education before you pay for your own.” In the podcast I believe you had contributing to a 529 ahead of paying certain loans off, including certain student loans.

Thanks for the reply, I’m glad to know that I was not imagining that your advice has migrated more toward aggressive debt repayment over time. I think your concerns regarding real-world behavior vs theoretical accounting are very valid. Personally I am guilty of some borrowing to buy luxuries via spending over debt repayment, but to a degree that I think (I hope) is modest, at least in relation to my income, and I don’t have any regrets about the few meaningful purchases and expenses we have made, i.e. I would make the same decision again. If you and your friends/family had a great time heli-skiing and made some lasting memories together, then it sounds like you made the right choice, and I suspect you would do it again. I guess the point is that you have found a level of debt that you are comfortable with and find manageable, and that you have made that work for you. I have just found it interesting to read through these comments chronologically to see how your view of debt has evolved over time.
I am currently very early in my saving/investing career, 3.5 years out of residency. I max all my retirement accounts (403b, 457b, backdoor Roths for me and my wife) and my student loans are now at approx. 100K, with rates ranging from 2.4%-5%. I don’t have any sense of urgency about that, I guess because I have currently in my taxable account approx. 145K saved over the past couple years, and so could decide to pay it off tomorrow if I was motivated to do so. In some hard to explain way, the ability to pay off a given loan at will has relieved me of some of the urgency to do so, as I am now making a conscious decision to keep that money invested and earning compound interest as opposed to having that debt continue out of necessity alone. I guess it is similar to your mortgage pay-off fund, I could consider this a student-loan payoff fund…I just can’t bear to part with it now and actually pay off the loans! The amount of arbitrage I am managing to accomplish is probably not huge, and this year I think we will hammer down the higher interest loans to a greater degree, if not completely pay them off.
As you have said many times here, there is no one right answer, and I certainly don’t want to split hairs over whether an unmatched 457b should be #6 on the list and a loan with a rate of 3.5% should be #7, honestly as long as you are putting (a lot of) money into one of those things you’re probably going to do OK.

Sounds to me like you’re doing just fine and struggling with the same decisions we all struggle with. 2 years ago, I preferred to invest in taxable rathe than pay off the mortgage. Today, I’m leaning the other way (but still haven’t paid off the last $95K or so.)

Jim, you’re a personal hero of mine after reading your blog recently and seeing how you reply to everyone despite your busy schedule. unfortunately, i came into it a little too late and am trying to play “Catch up” and would love your advice.

annual salary of 450 k. moonlighting of additional 50k
mortgage of 630k (stupid…i know now!) (financed at 15 years with 6k/month payment)
personal student loan debt of 320, now down to 240k, now fixed at 10 years at 2% with FRB. (3700/month payment)
wife student debt of 320 k at 7%
wife salary ~35k (now working part time b/c of recent 2 kids)
started an LLC, for my moonlighting gigs
max out my 401k (~18k)
recently started backdoor roth for both of us.
she has an LLC as well, but we haven’t contributed anything to a separate or solo 401k as of yet bc i wasn’t sure what to do with extra cash.

we were over 600k total student loan debt and i was reeling trying to figure this out. I opted to refi my home and student loans at a lower rate and now we are filing taxes separately so she can undergo IRB payments of her loans given her low income, but i’m getting hit hard with the solo tax burden. I’m not sure if this is the best and looking for advice moving forward. Should I start additional tax savings loans…pay off my student loans…pay off her AND my debt so we can file together…..Convert my LLC to an S corp to create more deductions. To be honest. i’m overwhelmed.

Well, as you’re well aware you’ve made a few minor errors with significant consequences. But you’re doing lots of things right:

1. Making lots of money
2. Refinanced your loans to a low rate (2% for a 10 year is incredible)
3. Maxing out a 401(k)
4. Doing backdoor Roths
5. Keeping her skills up so she can go back to work when able/desired
6. Mortgage less than 2X gross income
7. 15 year fixed mortgage

So take a deep breath. Let’s see if we can focus you a bit on what really matters.

The elephant in the room is her 7% student loans. I’d start there. What is the plan for those? She isn’t working full-time, so she isn’t making qualifying payments for PSLF. Therefore, presumably you all are going to pay those off. Sooner is better than later. They probably won’t refinance them just based on her income. If you want a lower rate, you’ll need to co-sign. Of course, that means if she dies (or leaves you) that you’re on the hook for them whereas otherwise they’d disappear or at least follow her in a divorce. But if the marriage is stable and she is healthy, I’d probably still refinance/cosign them and get busy paying them off.

Refinancing doesn’t pay them off of course. So now you’ve got an income of $535K and student loans of $560K in student loans. Ideally, you’d be living like a resident and get those paid off in 2-3 years. Unfortunately, you’ve already bought the big fancy attending house. So that means you’ll need to sacrifice elsewhere in order to get rid of those quickly. If you can do some retirement investing along the way, that’s great too. Your 401(k), Backdoor Roths, an individual 401(k) for your moonlighting etc.

The LLC/S Corp thing is small potatoes compared to the student loans. Don’t lose the forest for the trees.

I don’t think I’d do the Married Filing Separately thing in your situation. A lower payment doesn’t help when the goal is to pay the things off fast. You’re not making qualifying PSLF payments. And IBR forgiveness takes 25 years and is taxable anyway.

Thank you so much for the encouragement. Our plan for filing separately was to make the IBR payments for her which sum total to less then 2-3k/year x 25 years at which point they’d be forgiven. When we file together and we applied for pslf or ibr, they factor in my salary to her payments which make both of our student Lon payments nearly 8k/month, if not more, especially now that I refinanced mine at a short term

Her max salary will be no more then 50-75 k over her work career in which case, the total amount paid back using ibr (even over 25 years even with me taking tax hit) to govt will be drastically less then the total forgiven at the end of the time or even less then the amount she has now (320k). Factor in her interest that accumulates and our thought process was that in the long run, we would make out in her forgiveness at the end of the 25 years but still get stuck losing 200-300k in my tax penalties over the years; Unless I can decrease my tax bracket and burden, then that 25k hit annually for filing separately would go down drastically.

Per my accountant, they were not sure. I cant understand how people who only make 30-40k/year are expected to pay taxes on several hundreds of thousands of dollars of forgiven debt and also at what rate? Factoring in interest, her forgiven debt at the end of the time frame will be close to, if not more then 600-700k at the end of the 25 year period.

You’re actually in a similar situation to me, so I’m curious what you’ve decided to do.

My income is between 500-750 per year. My loans are 266K, just refinanced to 5 year fixed at 3.07%.

My wife has 344K and climbing, with 0 income right now. Loans are federal IBR, between 3.5-6.5%

I’m torn whether to pay hers down aggressively, refinance, remain on IBR, or some other option we haven’t thought of. As the law stands right now, she will be taxed on the forgiven amount, which will probably be around a mil in 25 years.

That may be the best option, but it will be brutal. I’m an EP, and the reason I’m able to make that level of income is because I hustle and work a ton of hours, and travel to high paying gigs, etc. I figure if I continue this way I can pay both our loans in 5 years, but it may burn me out… and these are years I can’t get back with my kids, etc. So before committing myself to that level of pain I want to explore every option.

I have an LLC, and the original plan was to pay my wife a small salary through the LLC, but keep it low enough that she has no required payment on IBR, then pay just the interest along the way for 25 years until the balance is forgiven. But emotionally I’ve realized I can’t tolerate the idea of carrying debt that long. I want it gone. I’ve considered whether bankruptcy may be an option for her (legally we are not married, so although we have kids and live as a married couple. we file taxes separately, etc.) but I know bankruptcy is a long shot with government loans – and also not particularly fulfilling. I’m also concerned that if we refinance and pay aggressively, we may miss out on some benefit of leaving them on the federal side (e.g. there are currently bills in congress to remove the tax requirement on forgiven IBR debt). But what is the likelihood government will come to the rescue?

So bottom line for me is I’ve reached a point where I’m determined to destroy all our debt, and I’m close to pulling the trigger on just paying hers aggressively for 5 years, but I want to make sure I’ve explored every option available before I commit to this task.

Her loans are with Navient, not consolidated. Most are 6.8%, and a few on 3.28%.

Knowing the little bits and pieces I’ve shared, would you recommend a) Remain with Navient, consolidate and pay aggressively, b) Remain with Navient, NOT consolidate and pay the higher interest loans down, followed by the lower interest, or c) bite the bullet, and refi with ELFI or private company?

My loans ~200,000, still paying IBR, but once moonlighting kicks up will start throwing more money at them, then refinance in year or two, and pay down heavy as I will likely go into private practice. Also saving for a wedding so it’s tough to be as aggressive as I would like.

Fiance is a Child Psychologist and Has ~200,000 in loans from grad school and PhD program. She just started IBR payments this month and qualifies for PSLF. She will likely remain in a school system for her career and thus PSLF may be a good option. In two years (2018 tax season) when we file taxes together her monthly payment will kick up from 100/month to ~1500/month. She may take a year off from work at some point when we have children.

1) If we still make payments during her time off does that count to the 120 payments needed for PSLF? My guess is it doesn’t, if shes on maternity leave do those payments count?

2) Does it even make sense for her to continue with PSLF, after 10 years I’m guessing she will have ~75,000 forgiven in loans which I know we will then get taxed on, and could anyone recommend a good loan calculator for sorting this out.

Hi WCI,
I have been stalking your website for a month or so and just bought your book after listening to an interview you gave to senior residents. Truly, thanks for your help.

I think I have a handle on what your answer will be. Sept 2016 was the start of my first year out as an attending. My salary is about 177K. I have a lot of neg net worth though: my student loan debt with undergrad and med school is about 477k ( ouch, i know, i winced when I saw the number jump when the interest capitalized, my rate is 7.5%). I’ve been making PSLF payments since 2014 (I unfortunately consolidated so earlier payments in residency don’t count) and my current employer counts. I have no other debt, I drive a 2005 4Runner that I paid off in residency and have held off on getting a mortgage. Straight out of residency, because of double boards and end of year expenses, I actually had 10k in credit card debt which was gone in my first 2 months out.

The loan amount…is overwhelming. I don’t have any credit card debt. At this point, I feel like i have to bank on a forgiveness program. I am currently on the REPAYE plan and will plan to only work in PSLF friendly places. My plan is to max my 403K plan (doing), start a traditional IRA and max that out as well at $5500. I have 16K in emergency savings, have decided i can truly live like a resident and downsize to a rent of $1000 or less. I was thinking about opening a separate savings account and pounding funds into that (moonlighting, etc) in the event PSLF gets capped or heaven forbid go away. It seems unwise to refinance or put more money into loans at this amount, if there’s a chance some amount of this debt can get forgiven. Or I suppose I could marry rich. But that’s plan B for now-I hope. Sound reasonable?

Just curious about retirement vs paying debt approach for my situation. I’m 3 years in practice and made $315 last year. My husband is a stay at home dad and had $50 k of cosigned high interest private loans and we paid it off last year. We paid $10 k cash to have our baby last year(we have terrible insurance so hit our out of pocket max). We have one car loan left at 1.75% interest, no cc debt and we have a modest $230k 15 yr mortgage at 3.25% fixed. I refinanced my student loans of $232k from a fixed 6.8% to 5% (15 yr repayment) about 1 yr ago. I realized that if I could pay an additional 45K off the principal, I could again refi them with no fees or penalty to a lower rate (4.49%) 10 yr and my minimum payment is the same. So I did this with my last two bonuses and now my balance is 185k at 4.49%. If I get another 30 K off the payment, I can go to a 7 or possibly 5 yr plan and qualify for even lower rates 3.3-3.75% and still swing the monthly payment. These rates are fixed and I would consider variable rates at that point as low as 2.6% once I have a lower balance. This decision to stay with a fixed rate would depend on if I get selected for a loan repayment scholarship of $100k I’ve applied for which would be dispersed over 4 yrs. This extra 40K towards the principal has allowed me to lower the duration of my loan repayment and also the rate whereas I would not have had the opportunity had I put that $ in retirement. I feel like I should keep doing this until I get the lowest interest rate available and then make the minimums and put the extra savings in retirement. This defers the extra $ that would have gone into retirement about 18 mos to 2 yrs by my calculation worst case scenario. I’m private practice and am putting about $37.5 k (via profit sharing) into retirement and I max out my yearly HSA. To max out retirement, I will need another $18k per yr. Is this frequent refinancing of student loans to get lower rates a plan that makes sense financially? Or should I stop at 4.49% fixed, be happy with the rate and just go to saving towards retirement? Ideally hoping to do both, but we’re expecting our income to go down a bit this year so I’m not sure if I’ll be able to in reality.

Thanks! I’m new to this… just read your book and am for the first time excited about my financial future.

Sounds like you’re doing great to me. Personally, with an income of $315K and a student loan of now only $185K, I’d probably to to a 5 year variable and continue throwing tons of money at it. I mean, $50K a year toward savings and $50K a year toward the loans gets rid of them in 4 more years and still leaves at least $100K to live on.

Just reviewed my Navient loan statement for the 1st time in way too long and am, quite literally, feeling queasy.

Current balance is $130K and interest rate is 5.375%. Payments are $780 per month and I have paid this the last 5 years. Have only retired $6K in Principal but $38K has gone to Interest; hence the queasy feeling. If I pay my student loan debt according to plan, I’ll pay $235K. That’s the bad.

The good is I am making $210K per year and job feels stable. Have maxed 401K for last 8 years and have balance of $320K. Have $140K in my brokerage account and just bought a home with mortgage of $2K (all in) per month. Only other debt is $5K on car at 2%. If I were young, I’d probably liquidity my equity positions and retire the loan debt… but I’m 53 (started late in the game) and deferred loan payments as long as I could hoping (*sigh*) that some miracle would save me from having to pay them. But at 53, I’m nervous about liquidating that much.

A few questions: (1) are negotiated settlements an option, (2) is refinancing a good option while I determine best long-term solution, (3) is paying in chunks, say, 5 large payments over 5 years a good strategy, (4) should I bite the bullet and liquidate my brokerage account, (5) is there a clear/obvious strategy to everyone that I’m simply not seeing?

That’s really common to feel terrible about debt. Use that nausea to motivate you to take care of those loans. Better to deal with it head on than be in denial about it.

It seems odd to me to have $140K in a brokerage account and a $130K 5.375% loan though. I’d probably get rid of both of them and pay the car off while you’re at it. While you’re not a spring chicken, you’re also not going to be retiring in the next 5 years so you don’t need to be on a short term plan. Pay off your debts, quit acquiring new ones, try to save at least 20% of gross per year for retirement and I think you’ll be fine by traditional retirement age.

1. Not for you. Who’s going to let you pay less when you have more than your loan balance sitting in a brokerage account?
2. Yes. But I’d pay them off instead. If you decide not to, then refinance to a 5 year variable and make big payments. If rates rise dramatically, then liquidate the taxable account to pay them off. Not a lot of risk there for you.
3. You really want to be in debt for 5 more years? Really? When you don’t have to be? Just pay them off.
4. Yes. Pay your debt off this week. Seriously. It’s not always this clear cut, but it is in your case. I have no idea why you think it would be better to do that if you were younger. It seems smarter to do it if you’re older- less ability to take risk.

I’ve always thought me a reasonably savvy investor (realize that’s not particularly true)… so defaulted to trying to build my investment portfolio vs. retire debt. As to the brokerage account question, I have been the beneficiary of market conditions with the so called FANG stocks. Have invested about $90K and rest has been equity appreciation.

As for the student loan quandary, I always did believe some forgiveness program would kick in that would help retire some of the debt. I was utterly irresponsible and deferred every possible time I could. And when payments were supposed to begin, I consolidated separate loans and received more deferment time. I also elected to pay interest-only payments for a period of time. In all, think I avoided addressing my loans for close to 15 years. Hence massive amounts of interest accumulated. I got on a dedicated payment plan about 5 years ago. Decent income only began about 8 years ago and I wanted to try and build some savings first.

As per the suggestions, the idea of taking my savings (brokerage account and about $10K in savings/checking) down to roughly nothing scares me. My inclination is to refi (5 yr variable is about 55% my current rate)… and then pay half the loan. That way, I still have something in savings… and then work to pay off the reminder in a few big chunks at a much lower interest rate.

As an aside, when you suggest saving 20% of gross per year… does that include 401K contributions? Or is the 20% suggestion above and beyond 401K?

Includes 401(k) contributions and match. But if you want to dive into the details, you should run the numbers yourself and see what you’ll need to meet your goals. The 20% number is just a rule of thumb with all the problems it entails.

I think your idea to “split the difference” when you’re not sure which of two good things to do is a good idea. It just won’t surprise me if you pay off the other half of the loan a year from now.

I must have missed something somewhere though if it will take your entire brokerage account AND all your cash to pay off the loan. Maybe I didn’t account for the capital gains taxes.

Thanks for the great post. What do you recommend for someone with a student loan interest rate at 4.85% for a 370K loan? It is very close to the 5% recommendation for payoff. I would continue to utilize tax advantage accounts such as maxing out 401K but should I also contribute to backdoor Roth for my spouse and I ($11K) or use that money to pay off the loan asap? Much appreciated.

I was wondering what your advice would be regarding paying back student loans that were locked in at a very low interest rate? I was lucky to get a rate of 1.875% and have 152,000 left to pay back. I have been an attending for 4 years and have been paying them back at a faster rate than the minimum payment. We are maxing out our retirement accounts and have some extra money to invest. My husband and FA both feel that we should invest that money in other accounts where we can get a return at a higher rate than the rate of the loans. I know you are all about paying loans back but most of the advice seems directed toward people with a much higher rate than I have. I know there is the emotional reward of paying off loans but what would be financial benefit of paying them off early vs investing into other accounts with a higher rate of return?

If you could borrow money at 1.875% to invest, how much would you borrow? If that amount is $152K, then go ahead and do what you’re doing. If you wouldn’t borrow that much, I would submit that you ought to prioritize paying that money back a little more than you are.

There’s no doubt that mathematically it makes sense to borrow money at <2% and invest it in stuff with a higher expected return than 2%. But behaviorally, people tend not to invest that money. They tend to spend it. So while I wouldn't pay off those loans before maxing out all my available retirement accounts, I wouldn't drag it around for decades either. I think med school should be paid for within 5 years of residency graduation. So if you're coming out of residency, I'd live like a resident, maxing out retirement accounts and putting everything else toward the loans. Then after they were gone I could buy a wakeboat guilt-free, cut back to half-time, start a business on the side, and enjoy the good life. Oh wait, that's what I did.

Seriously though, moderation in all things. It's okay to carry a little low interest debt as long as you're investing what would be going toward them, but it's also okay to pay them off even if they're at a low rate. If you don't have much saved yet, maybe carry the debt, bust your butt to earn more, and invest all you can. If you already have a $2M nest egg, what's the point of carrying around $150K in debt?

I can’t remember who I got it with in the first place. The loans have since been sold and are managed through Student Assistance Foundation. I graduated and refinanced in 2006 when the rates were good. Not sure such a good rate exists any longer.

Just paid of my loans at 1.8%. Best feeling ever. I doubt I will miss them enough to take out another loan. I also would not take a loan out at 1.8% to invest, so I feel comfortable I did the right thing.

You can do whatever you want. It’s your money. I wouldn’t, because I know how lame it is when people still have student loans 5 years after getting out of residency. How long do you want to owe for your education? In my case, 4 years was plenty. I think 4.15% is a wonderful guaranteed return. The other benefit of paying them off in 2-5 years is you get the lower 5 year rate and you can afford to run the interest rate risk yourself with a variable loan, so you save lots and lots of interest. Plus you can take advantage of the power of focus, which is worth a lot.

If you’re worried about PSLF, save up a side account in case it doesn’t materialize. But for loans that won’t qualify for PSLF, refinance them and pay them off fast.

I’m no expert, but I think this is a very personal decision and how debt averse and risk tolerant you are. I often ask myself, would I take a loan at 4.15% to invest in the market? Probably not, but that’s me. 4-5% guaranteed return is where I have my cutoff- debt with interest rates below that I don’t prioritize paying down and put extra in market. We’re in a bull market but I think it will eventually correct so there’s risk of losing too. Also, I’m not disciplined enough to insure I save that extra $2k to invest it ( as my husband says.. baby likes her shoes), so in my situation, it’s better to throw it at the debt. I’d be interested to see what WCI has to say.

Call me lame but I’m 8 years out from fellowship, still paying loans and will continue for the next 12 years. At 2.125%, it makes absolutely no sense for me to throw good money at debt when I can invest and make 3-4% on the differential.

It’s obviously up to you to do whatever you want, and one can certainly make an argument to invest on leverage with interest rates that low, but I’ll bet you decide at some point in the next 12 years to just get rid of it and simplify your financial life.

Already have full emergency fund and 401k contribute up to match. I just didn’t know if its better to put extra money toward auto debt or student debt first (I don’t get to deduct any interest from student loan interest).

No right answer there. The behavioralists would say auto loan # 1 first because it is smallest. The mathematicians would say auto loan # 2 because it has the highest interest rate. And if the student loan rate crept up, then switch to that. They’re all low interest and about the same interest rate though, so it doesn’t matter much. I’d just figure out when you want to be out of debt and pay enough each month to be out of debt by then, investing everything else.

I found your website a year after I signed up for a whole life insurance policy, and I knew then that I needed to figure out my finances sooner rather than later. So I’d love to hear you take:

29, single, no kids, gross income at 168,000. I currently max out 401k, HSA, and backdoor IRA.

– 89,000 in student loan debt at 3.35%, refinanced through SoFi
– 16,700 in auto loan debt at 3.35%
– 10,000 in credit card debt at 0% until December 2018

I have about 10k in an SoFi Wealth taxable account (no management/advisor fees as long as I’m a borrower) which I’ll use to pay off the credit card before December and 2 months of expenses in my emergency fund.

Well, after I dumped the whole life I’d draw up a plan to be out of debt within 2-3 years. I’d liquidate the taxable account and pay off debt with it. I’d probably burn my E-fund down to 1 month and pay off debt with it too. I’d probably keep trying to max out the 401(k), HSA, and IRA and put everything else I could carve out of my lifestyle toward the debt. If you can’t be out of debt in 5 years and max those things out, I might even pass on maxing them out. And I’d quit buying cars on credit. I don’t know that I’d sell the one you have and buy a beater to get out of debt faster, but I’d think about it.

Awesome site. I’d love your opinion on my financial scenario. New attending, started in Aug 2017, making about 190K per year. Have $28,000 refinanced through SoFi at 4%, $25,000 car loan at 0% and house mortgage about $250,000 at 3.53%. Single income house, with 1 child. Just opened 529 with minimal contribution so far. Have $50,000 in emergency fund currently. Saving about $5000 monthly. Plan on doing backdoor Roth this year (opened the Roth initially in residency). Also caveat about our house mortgage is that it’s 30 year but first 15 years fixed and then next 15 years ARM so we want to pay that off within 15 years (and not have to refi if we can avoid it).

Questions:
1. Thoughts on 457b? I know there’s a whole thread on this, but the bottomline I got was it’s a riskier investment.
2. Thoughts about paying off the student debt vs investing? Should I just pay off the entire debt in next 1-2 years or use emergency fund to pay it off sooner? I could use half my emergency fund now and just be done with the student debt.
3. Or another option is to keep the 50K e-fund and for the monthly $5000 I’m saving, put half extra toward student loans and other half toward investing.
4. My other thought was to pay off loans in 1-2 years while keeping e-fund largely intact, then use the extra monthly savings to increase mortgage payment (half) and invest (other half)
5. Totally unrelated, but for the 529 I have minimal contribution right now. I don’t plan on financing an entire college education through this but more like a cushion– any thoughts on reasonable contribution for this?

1. If the investment options are good, the distribution options are good, and the employer is stable, then use it.
2. I would have paid it off yesterday with that $50K. Same with the car loan. (Actually I’d be driving a cheaper car for a few more years.)
3. Also a good option.
4. Also not crazy.
5. It depends. I put in the max that my state lets me take a credit for. That’s $4K per kid per year. But it depends on how much you want to have, how much time you have, what returns you expect etc. Anything is better than nothing but honestly I think you should pay off your education before starting on that of your kids.

I have government (foreign) and Bank loans while in medical school. My government loans don’t accrue interest until I’m done residency and my bank loan draws 3.45%. I’m currently only using about $7K from my bank loan available $250K. I was reading about Dave Ramsey’s 12% Mutual fund return and thought about taking $50-$80K of my bank loan and investing it in mutual funds. Realizing that I probably won’t get 12% actual return, but hopefully better than 3.45%, is this worthwhile?

Should you invest on margin? I don’t generally recommend it. Could you come out ahead doing so? Sure. Could you also go bankrupt? Absolutely. I would spend your time and effort (and money) on learning how to be a great doctor right now. Minimize your loans.

I have referred to this article and list of loan/investing priorities many times, and I confess, it didn’t occur to me until recently that, unless I’m misreading it, one would never reach priorities nos. 6-9, because the opportunity to allocate each additional dollar to no. 5 “invest in risky assets in a taxable account (stock mutual funds or investment properties)” is unlimited.

Did you not make any IBR/PAYE/REPAYE payments during training? If so, PSLF should be just a few more years away. If you didn’t, there probably won’t be much left to forgive with PSLF after 10 years of payments. But the VA has some other student loan program, do you know about that? Maybe you could combine that with refinancing and paying them off.

I’ve been reading for a while, which prompted me to fund a Roth IRA each year and keep up as much as possible with student loans during residency- thanks. Before graduating I had term life and own occ disability set up as well. Now that I’m a new attending with drastically different income, I’d like your thoughts on next steps.

Debt: $60,000 student loans currently ~7% on avg; $10,000 on a 0% interest credit card (this was for taking boards, travel prior to starting work, and then surviving until first paycheck after graduating), no car note, no mortgage
Income: $350,000 in high cost of living city, rent is about $2500
Emergency fund: $20,000 in a savings account
Retirement savings: $30,000 in a Roth IRA with Vanguard; no 401k/403b or anything as my residency did not provide a match

I am in the middle of refinancing student loans and have been quoted ~2% for 5 years. My new job offers an HSA which I’ll max out, and a 401k (with no match) that I will max out NEXT year once I’m eligible. I will try a backdoor Roth IRA for the first time too for now.

With a much higher income and limited tax advantaged spaces, and considering the very low interest on my debts, how would you prioritize the loans vs taxable investment accounts or anything else you suggest?

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